This week in the market, though not overly headline-driven, was still an eventful one. As the title suggests, the “magic number” for the both the Dow and the S&P was reached (12,000 and 1,300 respectively). These two significant levels were reached, but nether index was able to make a close above the level (the S&P was short by just $0.46 on Thursday). Subsequently, a pretty large sell off occurred on Friday, which in the case of the Dow ended a week-long streak of higher lows as well as negating the entire week’s gains in both cases. Lets take a look at the S&P (on the week: -6.95 -5.41%):

Looking at the weekly timeframe we see a halt in the strong 5 month uptrend. From a technical perspective, the price is trading above the upper Bollinger Band (60, 2.0, –2.0). It has been trading at an overbought situation according to both indicators I have put up here. For the past 6 weeks, the prices have been two standard deviations above the relative 60 week moving average. The Stochastics (15,3,3) have also maintained this overbought state for quite some time, but as you can see, have made a cross, meaning a pull back could be in order.

Looking at the daily:

The daily chart looks pretty interesting to me as well. Again looking from a technical perspective, we see some looming bearishness (propagated by Friday’s sell-off). A few important things to take away from this chart:

1. The four day moving average of the close has crossed below the four day moving average of the open

2. We finally closed below 1280, a level tested on 5 different occasions in the past 11 days

3. The ATR (12) after a decline December and a steady stagnant period during January, it finally broke out above 10 on a highly negative day

I have drawn a line at the low from last week (around 1271), which will be significant price to break below, confirming my notion that there will be a correction.

Japanese Debt and US GDP

Speaking of the beloved S&P, in which we put so much trust, the Japanese debt was degraded from AA to AA- by Standard and Poor’s on Thursday. This was a big deal, and the Yen did fall relative to the dollar significantly Thursday, but the loss was fully recovered on Friday. Looking at the daily USD/JPY:

As you can see, there is major support at 82, making an interesting situation as the trading has consolidated. We will see if the dollar continues to weaken, or if it has hit a level of demand and can rally (which, if the recent correlation that I have talked about quite a bit, will slow the growth of the major indicies).

As I have said before, though I foresee a correction in the near future after my technical analysis (and fundamentally I believe a correction is long overdue), the rally may very well continue, and we may break through these “magic numbers” as we did back in November. The bottom line is to have a plan in any situation. and trade with the market, not fight against it. As always, questions, comments, and concerns are welcome.

2 Responses to The Magic Number

How much of the recent growth do you think is organic vs. synthetic? You should do a correlation between the feds monetary actions and the SPX. When the interest rates start getting pushed back up I think it might show the synthetic growth. Timing is hard to do, even the experienced goldman analyst would say that, but what other macro signals can we look toward for guidance?